July 25, 2017 Last Updated 10:29 am

A look at McClatchy’s Q2 earnings report ahead of other publishers reporting

The publisher of the Sacramento Bee reported that print advertising fell over 11%, despite a healthy gain in digital, but operating income increased as the company cut expenses

Most of the major newspaper and magazine publishers that are publicly owned report their quarterly earnings later this month and into August. One that reported early, and I missed, was McClatchy. The publisher of the Sacramento Bee and Miami Herald was able to report higher operating income, and ad revenue that fell somewhat less than other publishers have reported of late.

Still, ad revenue fell 11.1 percent versus the same quarter a year ago, despite a ten percent increase in digital-only advertising revenues.

But thanks to cost cutting, operating income came in at $12.11 million, though an impairment charge of $46.147 million meant that the company reported a loss of $37.446 million.

Next quarter McClatchy will record a $76 million bump due to the sale of CareerBuilder. The revenue bump is made up of approximately $8 million in normal distributions and $68 million of after-tax proceeds, so the earnings report will look good, but actual cash will be minimal (if I am interpreting that right). That sale is the reason for much of the impairment charge taken in the Q2 report.

The most encouraging thing about the report is that principal debt decreased by $15 million. Still, the company is still very much in debt. With only $8.4 million in cash on hand, its net debt stands at $850.3 million.

One of the things that makes McClatchy’s earnings report so interesting is that they do a good job of breaking out their ad revenue, showing you not just the breakout between retail, national and classifieds, but the breakout of classifieds by category — something a former CAM like myself appreciates.

Classifieds used to drive profitability at newspapers, something I am afraid many executives do not appreciate today. Not only was it the number one revenue driver, but it allowed papers to have larger news holes up front. Cut back on those back end pages dedicated exclusively to advertising and the news hole up from suffers.

Some chains handled some of their categories differently. For instance, at the San Jose Mercury News, when owned by Knight-Ridder, automotive was a retail category, with ads spread throughout the A section and elsewhere. During the paper’s peak, in the mid-nineties, employment advertising drove growth.

Looking at McClatchy’s report one can see just how dire the situation is regarding advertising, and it appears to be management’s view that little can be done about it.

“While the company believes in the value of print advertising, the declining trends in print advertising are not anticipated to subside in the remainder of 2017,” said CEO Craig Forman. “Management believes that print advertising will continue to become a smaller portion of advertising and total revenue.”

That is hard to argue with, but it does beg the question “what are the digital advertising initiatives being considered?”

Here is McClatchy’s Q2 report:


SACRAMENTO, Calif. — July 21, 2017

  • Grew digital-only subscribers to 91,000, or 13.8% from the first quarter of 2016
  • Reduced operating expenses 11.7% and adjusted operating expenses 4.6%
  • Reduced principal debt by $15 million
  • Grew digital-only advertising revenues 10.0%
  • Grew average total unique visitors 14.6%, local unique visitors up 10.7%
  • Entered into an agreement to sell a majority of our interest in CareerBuilder, expected after-tax proceeds of $68 million
  • Grew revenue categories other than print newspaper advertising to 74.7% of total revenues

McClatchy (NYSE-MNI) today reported a net loss in the second quarter of 2017 of $37.4 million, or $4.91 per share that includes after-tax non-cash impairments totaling $28.8 million on the carrying value of the company’s interest in CareerBuilder LLC (CareerBuilder) and other equity investments. In the second quarter of 2016 McClatchy reported a net loss of $14.7 million, or $1.89 per share.

The company reported an adjusted net loss of $6.1 million, which excludes severance and certain other items in the second quarter of 2017, compared to an adjusted net loss of $1.5 million in the second quarter of 2016.

Craig Forman, McClatchy’s president and CEO, said, “As we focus forward at McClatchy, the mantra of accelerating our pace and cadence is being embraced across the organization. And our changes are being well-received by customers — both long-tenured and new. In the second quarter, we moved forward by regionalizing our publisher structure, centralizing our audience department, expanding our exceleratetm digital marketing business, hastening our product release cycles and diligently working to close on our strategic real estate transactions.

“As I have mentioned before, achieving a normalized operating environment takes some time in digital transitions. While we continue to see strong headwinds in print advertising, we also are seeing our digital efforts in all aspects of the business moderate those headwinds. In the second quarter, our advertising revenue trend improved by almost one percentage point and our decline in adjusted EBITDA improved from last quarter by almost seven percentage points, important indicators of our strategic plans at work.

“Our commitment to journalism that matters is an area of focus that is unremitting. And reaching greater audiences with that journalism is at the core of what we do,” Forman continued. “Our newsroom reinvention and the rollout of our new audience management platform are key to these efforts. Two measurements of our success are growth in our digital subscriptions and in unique visitors. Digital subscriptions grew by 13.8% over the same quarter last year and our unique visitors grew by 14.6% over the same period.

“We plan to continue our digital audience growth in the second half of the year by providing relevant journalism to our readers and viewers while explaining the benefits of subscribing to our digital products,” Forman said. “We also will learn more about our customers as they begin using the new audience platform, and as a result we can engage more meaningfully with our subscribers.”

Second Quarter Results

Total revenues in the second quarter of 2017 were $225.1 million, down 7.1% compared to the second quarter of 2016. The sequential rate of decline is consistent with that reported for the first quarter of 2017 in the 7% range.

Total advertising revenues were $125.2 million, down 11.1% in the second quarter of 2017 compared to the second quarter of 2016. The rate of decline in total advertising revenue slowed in the second quarter reflecting a sequential improvement of 90 basis points compared to the decline reported in the first quarter of 2017. The decline in advertising revenues continues to be due to the softness in traditional print advertising offset by improvements in direct marketing advertising and digital-only advertising.

Digital-only advertising revenues grew 10.0% in the second quarter of 2017 while total digital advertising revenues, which includes digital-only advertising and digital advertising bundled as an upsell with print advertising, declined 0.9% compared to the same quarter last year. Direct marketing declined 1.8% in the second quarter of 2017 compared to a decline of 13.2% in the same period last year. The improvement in trend in the first half of 2017 was mainly attributable to new customers joining in the second half of last year at a few of our markets and the impact of rolling over the elimination of certain products during late 2015 and early 2016.

Audience revenues were $89.9 million, down 0.6% in the second quarter compared to the same period in 2016. Digital-only audience revenues were up 6.7% due to subscriber growth and pricing strategies implemented throughout 2016. The number of digital-only subscribers ended the quarter at 91,000, representing an increase of 13.8% from the second quarter of 2016. The strength in digital-only audience results were achieved despite the interruption that was inherent during the implementation of a new audience management platform during the quarter. New features will be rolled out in coming quarters that will enable additional revenue-generating strategies.

Average total unique and local unique visitors to the company’s online products were 66 million and 16.3 million, respectively, in the second quarter of 2017. These results represented growth of 14.6% in total unique visitors and 10.7% in local unique visitors in the second quarter of 2017 compared to the same quarter last year. Mobile users represented 60.2% of average total unique visitors in the second quarter of 2017 compared to 52.9% in the second quarter of 2016.

Revenues exclusive of print newspaper advertising accounted for 74.7% of total revenues in the second quarter of 2017, an increase from 70.4% in the second quarter of 2016.

Results in the second quarter of 2017 included the following items:

  • Non-cash impairment charge related to the write-down on the carrying value of our equity investment in CareerBuilder and other equity investments totaling $46.1 million ($28.8 million after-tax);
  • Severance charges totaling $5.6 million ($3.4 million after-tax);
  • Costs associated with reorganizing sales and other operations totaling $0.8 million ($0.5 million after-tax);
  • Gain on real estate transactions and charges associated with relocations of certain operations netting to $3.1 million ($1.9 million after-tax); and
  • Loss on extinguishment of debt $0.9 million ($0.6 million after-tax).

Adjusted net loss, which excludes the items above, was $6.1 million. Adjusted EBITDA was $35.5 million in the second quarter of 2017, down 18.2% compared to the second quarter last year. Operating expenses were down 11.7%, while adjusted operating expenses, which exclude non-cash and certain other charges, were down 4.6% in the second quarter of 2017 compared to the same quarter last year. (A discussion of our non-GAAP measures and the reconciliation to the comparable GAAP measures are provided below.)

Other Second Quarter Business and Recent Highlights

Real Estate Transactions:
On March 31, 2017, the company completed the sale of the San Luis Obispo, California, building and land for gross proceeds of $9.0 million.

The Sacramento, California, land and buildings sale and leaseback transaction is expected to close in the third quarter of 2017.

The company entered into separate sales agreements during the second and third quarter respectively for its Kansas City, Missouri real property. On April 4, 2017, the company entered into an agreement with 1729 Grand Boulevard, LLC, a 3D Development company, to buy the Kansas City Star’s downtown office facility. On July 12, 2017, the company entered into an agreement with R2 Capital, LLC to buy the Kansas City Star’sproduction facility, which will be structured as a sales leaseback transaction. The two Kansas City sale transactions will yield combined gross proceeds of $42 million and are expected to close in the third and fourth quarters of 2017, subject to customary closing conditions.

In the second quarter, the Company entered into a non-binding letter of intent to sell and leaseback its Columbia, South Carolina, land and building. The sale is expected to close in the fourth quarter of 2017, subject to customary closing conditions.

CareerBuilder:
On June 19, 2017, the Company announced that along with the current ownership group, it entered into an agreement to sell a majority of the collective ownership interest in CareerBuilder to an investor group led by investment funds managed by affiliates of Apollo Management Groupalong with the Ontario Teachers’ Pension Plan Board. The transaction is expected to close in the third quarter of 2017. Upon closing, the company expects to receive $76 million made up of approximately $8 million in normal distributions and $68 million of after-tax proceeds.

Upon the closing of the transaction, McClatchy’s ownership interest in CareerBuilder will be reduced to 3.5% from 15%. Management has estimated a fair value of the interest retained in CareerBuilder and its accounting impact of the transaction, and as a result, an additional pre-tax non-cash impairment charge of $45.6 million was recorded in the second quarter of 2017.

First Six Months Results of 2017

Total revenues for the first six months of 2017 were $446.3 million, down 7.1% compared to the first six months of 2016. Advertising revenues were $245.1 million, down 11.6% compared to the first six months of last year. Softness in print advertising negatively impacted advertising revenues but was partially offset by growth in digital-only advertising revenue of 10.8% when compared to the first half of 2016.

Audience revenues were $181.3 million, relatively unchanged when compared to the first half of 2016 and digital-only audience revenues were up 8.8% over the same period. The growth in digital-only audience revenue is attributable to the increase in digital-only subscribers through promotional efforts and rate increases initiated in the second half of last year.

The company reported a net loss for the first half of 2017 of $133.0 million, or $17.49 per share which included non-cash after-tax impairment charges of $105.6 million that are mainly attributable to the write-down of its CareerBuilder investment. Net loss for the first half of 2016 was $27.5 million or $3.48 a share.

Results for the first six months of 2017 included the following items:

  • Non-cash impairment charge related to the write-down of the carrying value of our equity investment in CareerBuilder and other investments totaling $169.1 million ($105.6 million after-tax);
  • Severance charges totaling $9.5 million ($5.8 million after-tax);
  • Non-cash write-down of inventory totaling $2.0 million ($1.2 million after-tax);
  • Costs associated with reorganizing sales and other operations totaling $1.2 million ($0.7 million after-tax);
  • Gain on real estate transaction offset by charges associated with relocations of certain operations netting to $2.8 million ($1.7 million after-tax);
  • Loss on extinguishment of debt of $0.9 million ($0.6 million after-tax);
  • Costs related to co-sourcing information technology operations and other miscellaneous acquisition-related costs totaling $0.3 million ($0.2 million after-tax); and
  • Net increase in taxes totaling $0.1 million for adjustments of certain deferred tax credits related to tax positions taken in prior years.

Adjusted net loss, which excludes the items above, was $20.6 million. Adjusted EBITDA was $58.6 million in the first half of 2017, down 21.0% compared to the first half of last year. Operating expenses were down 8.9%, while adjusted operating expenses, which exclude non-cash and certain other charges, were down 4.5% in the first half of 2017 compared to the same period last year.

Debt and Liquidity:
Debt at the end of the second quarter 2017, after repurchasing $15 million of bonds, was $858.7 million. The notes due September 2017 had a principal balance of $16.9 million outstanding with no other maturities coming due until December 2022. The company finished the quarter with $8.4 million in cash, resulting in net debt of $850.3 million. In addition, the Company has a $65 million revolving line of credit available for liquidity.

The leverage ratio at the end of the second quarter under the company’s credit agreement was 5.48 times cash flow (as defined) compared to a maximum leverage covenant of 6.0 times cash flow. The company expects its current de-leveraging strategies to reduce this ratio over the course of the year.

Outlook

Craig Forman said, “In the first quarter we indicated that our decline in adjusted EBITDA was not reflective of the trend we expect for the rest of 2017. We are happy to report that we improved upon our adjusted EBITDA trend by almost seven percentage points in the second quarter and we also expect to see trend improvements in EBITDA in the second half.”

For the second half of 2017, the company expects to grow digital-only advertising revenue at a double-digit rate for all of 2017, improving on the trend seen in the first half of 2017. The company expects to obtain the digital growth through organic investments in digital solutions like exceleratetm, as well as other digital products and partnerships.

Expenses are expected to include investments in exceleratetm throughout 2017, providing it with a larger sales force and with tools to drive revenue results in McClatchy’s markets, as well as adjacent markets. Management also sees further potential in its video portfolio as well as Nucleus, which is expected to help drive results for large retailers and national accounts.

While the company believes in the value of print advertising, the declining trends in print advertising are not anticipated to subside in the remainder of 2017. Management believes that print advertising will continue to become a smaller portion of advertising and total revenue. Audience revenues are expected to be stable in 2017.

Management remains committed to reducing operating expenses and will monitor costs throughout the year to achieve expense performance in line with revenue performance, despite the additional investments in news and sales infrastructures. Strategies to continue its digital transformation and reduce legacy costs include, among others, moving to regional publishers, centralizing audience functions, consolidating production and other functions and reinventing our newsrooms to have a digital-first work flow. These actions will result in initial implementation costs in the range of $18 million to $20 million, which may include accelerated depreciation and certain other non-cash costs. This compares to similar upfront costs of approximately $40 million in 2016 to further its digital transformation and continue the reduction of legacy costs. As noted above, management expects improving performance in adjusted EBITDA compared to the level of decline in the first half of 2017.

Management will maintain its focus on monetizing real estate assets throughout 2017 with the goal of realizing approximately $100 million in proceeds in 2017. The proceeds achieved from the real estate transactions coupled with proceeds from other asset sales and cash from operations will be utilized to de-lever the company through debt reductions and for further investment in the business.


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